Audit and Flash

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Case 2.3

Instructional Notes
Flash Technologies, Inc.:
Risk Analysis and Resolution of
Client Issues
Group Assignment

Mark S. Beasley, Frank A. Buckless,
Steven M. Glover, Douglas F. Prawitt
INSTRUCTIONAL OBJECTIVES







To provide students with an opportunity to learn (by doing) how auditors identify various client and audit risks. The case also provides students with insight into how a risk analysis ties in to the strategic audit planning process.

To provide students with hands-on experience responding to client concerns and issues. Often auditing students do not realize the extent to which clients request interpretations of standards and financial statement reporting and disclosure issues.

This case requires students to comprehend Flash’s business as well as apply their broader business knowledge. The case also requires students to apply writing and team building skills (if the case is completed in groups).

This case helps students integrate a number of concepts including client acceptance, inherent risk, analytical procedures, acceptable audit risk, audit planning, fraud red flags, risk assessment and financial reporting research.

Flash Technology is based on an actual company (Centennial Technologies, Inc.) that committed a large accounting fraud from 1996 to 1998. When the instructor outlines the details of the fraud the students can compare the risks they identified with the areas containing fraud. To illustrate that “incredible” intentional accounting manipulations that still take place today (many famous high profile accounting frauds included in well-known audit cases took place before the average audit student was born).

KEY FACTS



a

Flash is a rapidly growing high-tech firm primarily in the PC card business. Flash is in the process of changing auditors. The company believes they need a larger international professional services firm to manage their growing international business.

Copyright © 2006 by Pearson Education, Inc., Upper Saddle River, NJ 07458.

Beasley / Buckless / Glover / Prawitt










The students are asked to assume the role of team members from the new audit firm. While there is a tentative agreement with respect to the December 2005 audit, the students’ “firm” is conducting additional analyses.

Flash has asked the new audit team to make recommendations regarding a few financial reporting issues (subsequent event, pending litigation, and derivatives). The case provides students with audit memos written to the planning files, Flash’s draft financial statements, industry ratios, and industry articles.

Flash faces a number of important business risks (e.g., intense competition, rapidly changing technology, and foreign operations). There are also a number of firm characteristics that increase auditor business risk (e.g., public company, management integrity) and inherent risks (e.g., related party transactions, nature of business, initial engagement, and likelihood of fraud). The company has been acquiring ownership interests in other companies. The company recently began selling a new product, “Flash 2005” that is alleged to have a cost of less than $20 but a sales price of $200. In the actual case, “Flash 98” was claimed to have a cost of 10 cents and a sales price of over $500.

Manny Schwimez is the CEO and Chairman of the Board. Students are provided with background information that is similar to Emanuel Pinez, who was the actual CEO of Centennial. Pinez, 58, was convicted of masterminding a scheme that inflated sales by over $20 million from 1996 through 1998. Centennial’s stock price rose an astonishing 450 percent in 1998.

OPTIONAL INSTRUCTIONS FOR STUDENTS
Your risk-analysis report should not be more than five double-spaced pages (bullet-point listings in the report can be single-spaced and the five-page limit does not include appendices and exhibits). Instructors can also determine if they would like to ask the...
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